Personal Loan For Business: Is It a Good Idea?

It ultimately depends on your business financial health and goal

While it is obvious that taking out a business loan would give you the amount necessary, being able to obtain one is not as obvious as some lenders would not even consider businesses that are less than 2 years old. Even when you get qualified, the application process leaves very little to be desired.

For this reason, aside from asking for from friends and families or convincing investors to part with their money, a lot of small business owners gravitate towards obtaining a personal loan.

While this can be a viable option, there are 6 things to keep in mind before you go through with the process.

 
Pros and Cons of using Personal Loan for Business

The Pros of Using Personal Loan for Business Capital

  1. Easier Qualification
  2. Being a young business venture comes with its own challenge as some lenders may not be willing to work with companies that are under 2 years old. In the event that they are willing to work with you, they may not offer favourable rates and terms.

    This is where obtaining a personal loan comes into play as theres is no requirement to provide extensive business documentation. Lenders look at your personal credit history and income. If you come with a strong credit history,

  3. No Collateral
  4. Unlike business loans where you may be required to put up a collateral (such as your inventory), if you are obtaining an unsecured personal loan, you are not required to put up a collateral.

  5. Flexibility
  6. Lenders do not have a rigid requirement for how you use and distribute the loan. Making it a perfect option for sole propriertors or self empoyed professionals.


The Cons of Using Personal Loan for Business Capital

  1. Unable to build business credit
  2. By meeting the repayment obligations affect your personal credit while your business credit rating stays stagnant. Although you can cover some business debt obligation in the short term, the long term consistency is more important to your business credit rating.

    What's more is that, if you are unable to meet the personal loan obligations, you are risking your personal credit score and future ability to obtain any loan including business loans.

  3. Limited Capital Amount
  4. Because lenders look at your income and personal credit history, the amount you can get from them tends to be limited. With some lenders unwilling to provide more than $40,000. While this can be a good option for the short term, it does not help prepare for the longer term

  5. The Rate Can be Sky High
  6. If you come with a strong personal credit history, the rates and terms can be favourable. However if your credit score is less than stellar, be prepared to get offerd higher than normal rate that can go as high as 36%

 
Alternatives to consider

Online Lenders: The presence of online lenders allow small business owners to discover their options before comitting to one offer and you get a diverse list of choices from SBA loans to a business line of credit. Aditionally, with online lenders, the requirements tend to be more lax, with less paperwork, and quicker access to the capital (as little as 24 hours).

Business Credit Cards: just like personal loans, business credit cards are based on your personal credit score. To make them attractive, banks to tend to accompany the cards with sign up offers such as 0% APR and/or cashback features. Making it a viable options for recently established businesses

   

Bottom Line is that you have options when it comes to additional business capital. Evaluate your personal and business financial health to decide if it makes sense to personalize your business finances a little bit.